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Ask HN: Help on finding a deal for transitioning a tech team?

Dear HN Community, I would like to ask you opinion or advice on following situation: The parties: Tech company: We are a development company with two offices, one in central europe and one in eastern europe Startup: A startup founded by two non-tech founders from the finance industry Initial Agreement: Roughly 5-6 years ago we (tech company) agreed to build and launch a first version of the product (a trading platform) for the startup and maintain it for 4 years. Tech company would put together a dedicated team needed to build and maintain this platform. Startup would cover the basic cost of the development team (salaries, insurance, office, ...) without any markup. For that, the we (tech company) received 10% in equity pre-funding. Situation now: The platform has been successfully launched and maintained for 4 years. The platform went through several iterations of improvements and new features. There has been a seed funding round at a ~15 Mio evaluation leaving the two founders of startup at ~51% of shares and us with around 7.5% after dilution. The dedicated tech team (hired by tech company) consists now of a CTO (which is "our CTO", e.g. the CTO of tech company) and 4 fulltime Software Engineers. Startup is ramen profitable now with a revenue of 0.5 Mio USD in the first half of 2021. Expected growth of revenue +50% in 2nd half to 0.75 Mio USD in H2. The problem: The initial contract is expiring basically now. For several reasons it makes sense to transition the tech team (CTO and 4 SW Engineers) from tech company to startup, main reasons being that startup should not be "depending" on tech company, the startup should have its own CTO and tech team (important to future investors) and the startup does not further need to proxy "access permission" to sensitive data from customers to tech company. We all agree its the best way forward to make this transition of the tech team and that tech company offers managerial support for this transition for the next ~2 years by founding a legal entity in eastern europe (as subsidiary of startup), finding an office space, transition the team, possibly hire new team members and see that things go "smooth". What we cannot agree on is what a "new deal" could look like or what principles to apply here. Any inputs, opinion or advice are very welcome. Thank you.

908B64B197 5y ago
> The initial contract is expiring basically now. For several reasons it makes sense to transition the tech team (CTO and 4 SW Engineers) from tech company to startup, main reasons being that startup should not be "depending" on tech company, the startup should have its own CTO and tech team (important to future investors) and the startup does not further need to proxy "access permission" to sensitive data from customers to tech company. Why? It sounds like the relationship worked out great so far. Have they considered acquiring the (tech) company? Is the startup the only customer of tech company? Where's the startup headquartered?
- polygonwindow- 5y ago
  yes, the relationship worked out really well but a transition of the team definitely makes sense for the reasons stated above. Investors are reluctant to invest in a company that is based around a technical product (the platform) but has no dev team and CTO in-house... > Have they considered acquiring the (tech) company? Is the startup the only customer of tech company? Where's the startup headquartered? Well, not really but would be a possibility. But the tech company has significant business besides the startup. The startup is one "venture" of the tech company. Company size of tech company is ~45 FTEs and revenue is a few millions (besides startup). Startup is headquartered in central europe.
sokoloff 5y ago
Why would the tech company need to provide managerial support if the CTO is also transitioning? It seems like the CTO and 4 SWEs could transition, hire local counsel to setup the entity, and hire an office manager to coordinate with the payroll provider, the landlord, etc. (all under the startup with the tech company merely making an intro to a competent lawyer). Basically: get the ties cut as quickly and cleanly as possible if the goal is to get the startup to stand on its own two feet with the tech company becoming just a line item on the cap table after that. (The office manager would have to cheaper than staying tangled together.) If that’s not the goal, perhaps leaving things as-is and extending the contract with the employees being billed at some markup is now okay. If I were the startup and had a path toward growth and profitability, I’d want the transition to take 2 weeks for the majority and 2 months to complete, not 2 years.
- polygonwindow- 5y ago
  Thanks! Managerial support is more in relation to setting up the subsidiary, dealing with local authorities and employee contracts, hiring and so on since the CTO is busy with management of the dev team and development of the platform. In this case, the local management of the tech company would act as the local counsel. The guys from startup are based in central and western europe and are focusin on getting the sales and sales team up and are not "very familiar" with eastern europe authorities or legal aspects and do not want to spend time with these "tasks". In regards to getting the ties cut as soon as possible: The discussion came up now since the initial contract is expiring but there is no rush in the actual transition. Startup is happy with the current contract and would like to extend it but for the tech company that does not really make sense since currently tech company has no profits out of the deal and held up the initial end of deal for which it got the equity. Adding a markup now would be an option but that markup would need to be pretty significant to be interesting... Also, the terms of the transition of the team (which all agree makes sense at given point in time) should be clarified – the stance of tech company is that the transition of the the team does not come "for free" which is the main discussion point.
  - sokoloff 5y ago
    The last point seems totally fair (assuming the contract provides for that). A recruiter fee would typically be 30% of first year comp (payable around 90 days in). That might be a good anchor point in the discussions. If there’s no no-poaching clause, startup should prefer to pay a 25% bonus to the employees to encourage them to jump voluntarily, which is a small burning of bridges of course. For an intact team experienced with the product, maybe a slightly higher figure is in order, but realize that the startup is also going to have to retain these employees, so they’re likely to incur additional costs on their end as well, so you want to split the cake somewhat evenly. I’d imagine anywhere from 25-50% of first year salary would be the range that I’d expect to see, with maybe slight upside to the tech company side. The reason I suggest to hire an office manager is exactly to offload the CTO from those office/company time sucks, leaving them to focus on the tech and the team. Edit to add: I view that minor transition tasks are pre-paid by having 7.5% of a company you hope will succeed.

908B64B197 5y ago

> The initial contract is expiring basically now. For several reasons it makes sense to transition the tech team (CTO and 4 SW Engineers) from tech company to startup, main reasons being that startup should not be "depending" on tech company, the startup should have its own CTO and tech team (important to future investors) and the startup does not further need to proxy "access permission" to sensitive data from customers to tech company. Why? It sounds like the relationship worked out great so far. Have they considered acquiring the (tech) company? Is the startup the only customer of tech company? Where's the startup headquartered?

polygonwindow- 5y ago
yes, the relationship worked out really well but a transition of the team definitely makes sense for the reasons stated above. Investors are reluctant to invest in a company that is based around a technical product (the platform) but has no dev team and CTO in-house... > Have they considered acquiring the (tech) company? Is the startup the only customer of tech company? Where's the startup headquartered? Well, not really but would be a possibility. But the tech company has significant business besides the startup. The startup is one "venture" of the tech company. Company size of tech company is ~45 FTEs and revenue is a few millions (besides startup). Startup is headquartered in central europe.

sokoloff 5y ago

Why would the tech company need to provide managerial support if the CTO is also transitioning? It seems like the CTO and 4 SWEs could transition, hire local counsel to setup the entity, and hire an office manager to coordinate with the payroll provider, the landlord, etc. (all under the startup with the tech company merely making an intro to a competent lawyer). Basically: get the ties cut as quickly and cleanly as possible if the goal is to get the startup to stand on its own two feet with the tech company becoming just a line item on the cap table after that. (The office manager would have to cheaper than staying tangled together.) If that’s not the goal, perhaps leaving things as-is and extending the contract with the employees being billed at some markup is now okay. If I were the startup and had a path toward growth and profitability, I’d want the transition to take 2 weeks for the majority and 2 months to complete, not 2 years.

polygonwindow- 5y ago
Thanks! Managerial support is more in relation to setting up the subsidiary, dealing with local authorities and employee contracts, hiring and so on since the CTO is busy with management of the dev team and development of the platform. In this case, the local management of the tech company would act as the local counsel. The guys from startup are based in central and western europe and are focusin on getting the sales and sales team up and are not "very familiar" with eastern europe authorities or legal aspects and do not want to spend time with these "tasks". In regards to getting the ties cut as soon as possible: The discussion came up now since the initial contract is expiring but there is no rush in the actual transition. Startup is happy with the current contract and would like to extend it but for the tech company that does not really make sense since currently tech company has no profits out of the deal and held up the initial end of deal for which it got the equity. Adding a markup now would be an option but that markup would need to be pretty significant to be interesting... Also, the terms of the transition of the team (which all agree makes sense at given point in time) should be clarified – the stance of tech company is that the transition of the the team does not come "for free" which is the main discussion point.
- sokoloff 5y ago
  The last point seems totally fair (assuming the contract provides for that). A recruiter fee would typically be 30% of first year comp (payable around 90 days in). That might be a good anchor point in the discussions. If there’s no no-poaching clause, startup should prefer to pay a 25% bonus to the employees to encourage them to jump voluntarily, which is a small burning of bridges of course. For an intact team experienced with the product, maybe a slightly higher figure is in order, but realize that the startup is also going to have to retain these employees, so they’re likely to incur additional costs on their end as well, so you want to split the cake somewhat evenly. I’d imagine anywhere from 25-50% of first year salary would be the range that I’d expect to see, with maybe slight upside to the tech company side. The reason I suggest to hire an office manager is exactly to offload the CTO from those office/company time sucks, leaving them to focus on the tech and the team. Edit to add: I view that minor transition tasks are pre-paid by having 7.5% of a company you hope will succeed.